The world of DeFi (decentralized finance) has a good deal of competition. Bitcoin is the world’s first programmable money, but other projects sought to make it even easier to program blockchain assets. The first was Ethereum, whose goal was to give developers an easier way to create applications that ran atop a decentralized blockchain.
This allowed people in search of loans or greater yields to circumnavigate banks and institutions that charged large fees and required proof of identification. Now, individuals can use DeFi to have a unit of account, means of trade, loans and more without the need or approval of a third party.
One of the largest competitors to rise out of the DeFi space is the Binance Smart Chain (BSC). But what is BSC and how does it work?
What is Binance?
Binance is a cryptocurrency trading exchange founded by Changpeng Zhao. The company was initially based in China but relocated to the Cayman Islands after increased Chinese regulation threatened its business.
Binance quickly became one of, if not the largest crypto trading platforms in the world with its extensive list of trading pairs and relatively low fees compared to competitors.
Binance Smart Chain
In September of 2020, Binance announced its new DeFi platform, BSC, which was later launched in April. Its purpose was to offer an alternative to Ethereum and other leading DeFi platforms.
Over time Ethereum grew past what its infrastructure could even handle, causing congestion, slow transactions and fees so high that sending anything under $100 was borderline impossible unless timed perfectly.
This led to the rise of other smart contract platforms like BSC, which rapidly grew as Etheruem couldn’t provide a viable platform for those that couldn’t afford the fees.
Today, BSC has $26 billion in total value locked in the various applications that run on the platform. But what is BSC and how does it compare to others like Ethereum?
Binance Smart Chain vs. Ethereum
Binance has made huge strides in catching up with Ethereum in terms of trading volume. They also both have extremely similar applications built on top of them like decentralized exchanges and lending and borrowing platforms. But they operate on two vastly different consensus mechanisms.
A consensus mechanism is a system that allows nodes (participants) in a distributed computer system (blockchain) to reach a “consensus” about the correct set of data (transactions). This is what gives blockchain networks their security and allows the participants to verify the authenticity of transactions without needing to trust each other.
Different blockchains have different ways of forming this consensus. Ethereum currently uses a mechanism known as Proof-of-Work (PoW), the original consensus mechanism used by Bitcoin. Binance, on the other hand, uses a method called Proof-of-Authority (PoA).
In PoA, the block creators are known as validators. These validators are pre-approved and chosen by Binance, as explained by Binance’s own website. To be approved, they must confirm their real identities, invest money to prove long-term commitment and be equal to all other candidates, making PoA reputation-based by design.
In this model, Binance has absolute control over the blockchain. They decide who becomes a validator and they remove validators at their discretion. This requires the users must trust that Binance will behave in their best interest. Should Binance decide to alter any aspects of the chain or ecosystem, it has the power to do so.
The founder and CEO of Binance, Changpeng Zhao, famously said that BSC is like “CeDeFI,” or centralized DeFi. The tweet where he made these comments has since been deleted, but according to BSC’s founder, it is not a decentralized financial application ecosystem.
In the thread that stemmed from Zhao’s tweet, he said that the benefits from such centralized control are that Binance itself can vet projects built on the system, but more than one project has already “rug…